Bank Scorecards: The Devil's in the Details

More and more companies are grading their banks' performance -- and banks are eager to help. New measurement methods are making both sides happier.

If you ask a group of CFOs whether they think relations between banks and corporate finance departments are (a) deteriorating because of tight credit, bank mergers and the decline of personal service, or (b) improving because of new technol-ogy and fewer, more strategic relationships, chances are, the answers will be about evenly split. And many of your respondents may be tempted to reply "both of the above." Companies' banking relationships are in flux, and finance executives' level of satisfaction with the services their banks provide varies widely.

But while they may not always see eye-to-eye, banks and their corporate customers are finding common ground in their desire to improve the reliability and efficiency of bank services. After a time when big issues like companies' need to preserve liquidity and access to credit often swept aside little issues like banks' data-keying errors and missed reporting deadlines, both sides are reasserting the importance of the little things. And both are turning to sophisticated performance metrics to quantify banks' success -- or failure -- in managing those critical details.

Savvy finance departments have long used report cards as a way to push their banks to do a better job, especially in their cash management services. A scorecard is a tough management tool, a way to hold your banks to a reckoning; if they don't do what you want them to do, you can give them low grades. A new generation of these evaluation tools is seeing a surge in popularity. And now banks are developing their own performance report cards and working with their customers to identify problems and to document successes.

This shared pursuit of high performance is restoring goodwill and respect in banking relationships that often have frayed over the past three difficult years, bankers and treasury pros say.

Burnishing Banks' Reputation

Bank scorecards' usage has risen 30 percent in the past two years, according to Leo McFarland, first vice president for global treasury services at Bank One, Chicago. He estimates that two-thirds of scorecards are bank-built, and one-third are created by banks' customers. That reverses the ratio of 10 years ago, he notes.

Increasingly, organizations are using scorecards to measure the quality of banking relationships, McFarland says. They are no longer limiting their reports to counts of mistakes or missed deadlines in servic-es such as lockbox processing. And more companies are turning to software tools, including Web-based systems, to create the cards, he reports.

For banks, scorecards are powerful marketing tools that enable them to work more closely with favored clients in order to ensure their satisfaction and build their loyalty. And a scorecard can burnish an institution's reputation for quality -- provided that the bank consistently achieves high scores, the tool's metrics are credible and word gets around.

A treasury manager's perception of a bank is colored by his or her most recent bad experience, notes David C. Robertson, a principal with Treasury Strategies Inc. in Chicago. A bank can use its scorecard to remind corporate customers of the overall excellence of its performance -- a useful antidote to a bad episode. What's more, a bank's commitment to measuring and reporting the quality of its services sends a signal to the market that it is serious about earning good grades, and that helps it attract new business, he says.

Fewer Repairs

Banks also see scorecards as a valuable source of quality-control data. "If you measure it, it improves," observes Blaine Carnprobst, vice president and lockbox product manager at Mellon Global Cash Management, Pittsburgh. "And scorecards are the only way to get objective measurement."

Last June, New York City-based Citigroup introduced a scorecard that select customers can use to rate the bank's performance. "It's an attempt to make us proactive rather than reactive," explains Steve Allen, director of client service and cash management operations for North America. "We identify transactions that went off course, and then look for the root causes and work with the corporation to fix them, regardless of where the fault may lie." He adds that "quality standards and performance metrics are the key to making it work."

Citigroup's scorecard focuses on the repair rate -- the incidence of transactions that the bank is unable to handle auto-matically and so must process manually. Citigroup compiles the data and enters it into the scorecard; the only thing the bank asks its customers' managers to do is participate in analysis and problem-solving activities, Allen explains.

"We've been able to call attention to problems treasury managers didn't even know they had," Allen reports. "We've seen significant reductions already in our funds-transfer repair rates." He adds that the scorecard "complements whatever a corporation may use to track quality; it doesn't replace it."

Critical to Quality

In 2003, Bank of America, in Charlotte, N.C., implemented a scorecard to measure its success in helping corporate customers achieve their goals, according to John Purciarello, senior vice president, global treasury services. The scorecard incorporates the principles of the bank's Six Sigma quality measurement program.

Bank of America starts the evaluation process by working with its customer to define a goal that's "critical to quality" -- a CTQ, in Six Sigma jargon. For example, the customer might want to achieve a 50 percent reduction in its staff's A/R processing hours, or it might decide to aim at ensuring that every incoming payment is applied within 48 hours.

Next, the bank develops a program to help the company achieve the goal. It adapts a generic measurement template to fit the CTQ, and then collects information from the customer to populate the scorecard's fields, Purciarello explains. The project team periodically reports scores to the customer, and it also issues grades to the bank units tasked with delivering the solution.

Purciarello notes that companies' in-house bank report cards usually are designed by their treasury department and reflect that function's goals. These tools may not be broad enough to measure how well the bank is performing for other constituencies, such as A/P, A/R, credit and accounting, he says. In contrast, Bank of America's approach is "a revolutionary concept," he insists. "It doesn't just measure how well we satisfy treasury, but all the corporate stakeholders in the CTQ."

Bank of America's scorecard is not intended for use in resolving simple service issues, Purciarello notes. "You don't need a sledgehammer to crush an ant," he says. "This will be used to evaluate our progress with complex solutions."

Treasury-Built Yardsticks

Of course, finance executives are not about to turn the job of building their bank evaluation mechanism entirely over to their banks. So they continue to tweak their own report cards. A significant benefit of an in-house scorecard is that companies can use it to compare multiple banks and determine which one is doing the best job.

After more than 10 years' experience in measuring and reporting its banks' performance, Atlanta-based telecommunications provider BellSouth Corp. has reached a firm conclusion: Scorecards get results. Bankers have been promoted -- and even dismissed -- partly on the basis of BellSouth's quality assessments, says Anita Stevenson, associate director of liquidity management. And relationship managers at BellSouth's banks have used those reports to convince bank executives of the need to fund product and service enhancements, she adds.

Because of recent bank mergers and BellSouth's strategy of funneling its business to fewer banks, the number of scorecards the company issues is shrinking, Stevenson says. Thanks to e-mail and spreadsheets, the evaluation process is faster and more automated than it was when BellSouth first introduced scorecards in the early '90s, she notes. It's still labor-intensive, though, so the company has reduced the number of evaluations it issues each year for each bank from four to three.

BellSouth managers grade the company's banks on a scale ranging from one (far below expectations) to five (far above expectations). "Anytime they grade a bank as below satisfactory, they have to give a reason," Stevenson notes. And they use the scorecard to praise as well as criticize, she says. (See How To Rate Your Bank's Performance below.)

BellSouth uses a variety of scorecards, each with a different focus. "What you expect from a disbursement bank is very different from what you expect from a depository bank," Stevenson points out. "The surveys we use to determine each bank's score have to be tailored to the services we use from that bank." But some grade categories apply to all of the company's banks. The scorecards always rate the professionalism and responsiveness of the bank's calling officers and the quality of its problem resolution updates and account analysis statements.

And scores count with BellSouth. "We absolutely consider a bank's scores when we have new business to award," Stevenson insists. "A bank with consistently low scores that doesn't fix problems won't be considered."

Slashing the Error Rate

Alltel Corp., a communications company based in Little Rock, Ark., implemented its scorecard in 2002 when it outsourced retail lockbox processing to three banks, says Joy Gentry, director of vendor management. The company grades its banks in five categories: item processing errors; funds processing errors; high-impact errors, such as late or inaccurate transmissions and misdirected packages; holdovers; and outstanding research requests. The maximum score in each category is 180 points. In addition, Alltel assigns each bank a weighted composite score for overall performance.

The scorecard's purpose is to eliminate mistakes, says Gentry. Error rates may seem low in relation to the total number of transactions the banks process, but "each error is one of our customers who calls us about it, so we want to get the errors down to zero," she says. "And the scorecard is helping us do that." Alltel's monthly reports motivate its banks to determine why errors are occurring and then modify their processes to prevent them. So far, the cards have cut the banks' error rate by at least half, Gentry reports.

Alltel currently uses its scorecard only for retail lockbox services. "It's one very specific activity that is easy to score; you just count the errors and record that number," Gentry explains. Setting up the performance measurement system took time, she adds, but once Alltel's workers learned to send error information to a central location and managers learned how to tabulate the data quickly, the program required much less effort.

Pluses and Minuses

Success stories like BellSouth's and Alltel's are common. Two years ago, for example, Anthem Inc., a health benefits company in Indianapolis, began grading its 15 banks on a scale of A to F. "It's working great," says Angie Lofton, senior cash management consultant. "If a bank gets a low grade, we have a teleconference about the problem, and that usually brings the score up."

However, for all their attractions, scorecards are no rival to sliced bread. Designing and implementing them takes time -- a scarce commodity in many lean treasuries. And even true believers admit that there are limits to what a scorecard can achieve.

Corporations that borrow heavily from their banks may find that scorecards are ineffective when credit is tight -- as it has been recently -- especially if their credit ratings decline. "You're not in the driver's seat if you're headed for Chapter 11," notes G.M. Stetter, managing director and head of U.S. cash flow advisory in the Jersey City, N.J., offices of ABN Amro Bank. "You borrow money wherever you can get it and usually scrap the report cards if you have been using them." Under those circumstances, banks aren't much motivated to compete for top grades, he observes.

At the same time, Lofton points out, "even credit banks want to know how they're doing. They still care about customer service. They know it is the key to getting future business."

Stetter agrees that, for most companies most of the time, scorecards are valuable tools. Using a scorecard "raises the bar," he observes. "No bank wants to be low man on the report card. If they are, they know they won't get choice business in the future. It's more effective than using a beauty-contest RFP. If treasury positions itself as the purchasing agent for bank services, then it owes the business units it serves to choose and maintain the highest levels of service."

Stetter recalls that when he was a treasury executive at Merrill Lynch & Co. Inc., that company "used comprehensive report cards and scored banks on 32 different criteria. Setting them up and making sure they would be used even-handedly was a real chore, but once the initial work was done, the process pretty much kept itself going."

Scorecards fall into two broad categories, Stetter says: the Six Sigma type that tallies quantities such as errors or missed deadlines, and the more qualitative kind that measures variables such as satisfaction and responsiveness. The latter type is more interesting and potentially more valuable, he says.

David O'Brien, assistant treasurer of IT outsourcing services company EDS Corp. in Plano, Texas, has used bank performance metrics for 20 years with various companies he has worked for. Whenever possible, scorecard standards should be quantitative and objective, he says. However, he notes that most of the services EDS uses call for a somewhat more subjective judgment. "It's more art than science," he observes. And there's no such thing as generic metrics. "When I was with Holiday Inn, what we measured was quite different than what we measure at EDS," he says.

It's only worth measuring the top four banks in each of the company's service categories, O'Brien adds. Below that level, there is not enough data to ensure that the exercise is valid and useful.

Once a year, O'Brien sits down with his company's bankers to review their scorecard results. But EDS is consolidating its banking design -- one bank now handles all of the company's lockbox business, for example -- so its ability to make comparisons is decreasing, and the evaluation is losing relevance, he notes.

Achieving the goal of motivating banks to improve their performance takes more than a scorecard, even one that's well-designed and systematically applied, Stetter points out. Success starts, critically, with selecting the right banks. "You have to choose banks that have an appetite for the kind of business you have," he says. "If they want that business and consider it profitable, they'll want to keep it and get even more of it. And they'll see earning top scores as a way to do that. If they think the business is unprofitable, they won't care if they're not scoring well."

Win-Win

Still, organizations on both sides of the banking relationship can benefit from scorecards. "Think of the scorecard as an annual physical for the banking relationship," advis-es Renee McKenzie, Atlanta-based senior vice president of Wachovia Treasury and Financial Consulting. "Even when a relationship is working well, things change over the course of a year at both the bank and the corporation, so you need to take stock, reset priorities and deal with new problems that may have surfaced," she says.

Regardless of whether the scorecard is developed by the bank or the customer, both organizations should feel that they own the project, McKenzie says. A scorecard should not be something one party forces on the other. She adds that the evaluation's scope should be broad, embracing accounting, investment management, credit and finance as well as cash management.

The popularity of scorecards is rising because these tools can enhance relationships, and both banks and their customers have a stake in forging strong ties. "Corporations are outsourcing more and more of their financial operations to banks, and that makes a comprehensive system of performance measurement more important than ever," Stetter concludes. "And you have to measure qualitative issues as well as quantitative ones. At the end of the day, service still comes from people."